Computer Sciences' Dividend Is Safe
As a dividend investor, it pays to follow how much of a company's money goes toward funding its dividend. A nice yield now won't matter much if the company can't keep making those payments going forward.
Here, we'll highlight a given company and its closest competitors to see just how safe their dividends are, with a little help from three crucial tools:
- The interest coverage ratio, or earnings before interest and taxes, divided by interest expense. The interest coverage ratio measures a company's ability to pay the interest on its debt. An interest coverage ratio less than 1.5 is questionable; a number less than 1 means that the company is not bringing in enough money to cover its interest expenses.
- The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.
- The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.
Each of these ratios reflects dividends paid in the trailing 12 months, while yields are the expected forward yield. Let's examine Computer Sciences (NYS: CSC) and three of its peers.
EPS Payout Ratio
FCF Payout Ratio
Hewlett-Packard (NYS: HPQ)
International Business Machines (NYS: IBM)
CA Technologies (NAS: CA)
Source: S&P Capital IQ.
With an interest coverage of 5.7, Computer Sciences covers every $1 in interest expenses with $6 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are below 25%, you shouldn't have to worry that Computer Sciences will need to cut its dividend anytime soon.
Another tool for better investing
Most investors don't keep tabs on their companies. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. We can help you keep tabs on your companies with My Watchlist, our free, personalized stock-tracking service.
- Add Computer Sciencesto My Watchlist.
- Add Hewlett-Packardto My Watchlist.
- Add International Business Machinesto My Watchlist.
- Add CA Technologiesto My Watchlist.
At the time this article was published Follow Dan Dzombak on Twitter at @DanDzombak to check out his musings and see what articles he finds interesting. Try any of our Foolish newsletter services free for 30 days. The Motley Fool owns shares of International Business Machines. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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